Sebi approves new 'flexi-cap' category with freedom to invest across m-caps

Industry players reckon most of the existing multi-cap funds will switch to the new category

The Securities and Exchange Board of India (Sebi) has heeded the mutual fund industry’s request for a new ‘flexi cap’ category, with the freedom to invest across market capitalisation buckets, effectively laying to rest apprehensions over the recent change in multi-cap definitions.

Fund houses can launch new schemes under this category as well as convert an existing scheme to a flexi-cap fund after selecting a suitable benchmark, the regulator said on Friday after taking in inputs from the Mutual Fund Advisory Committee, and earlier the Association of Mutual Funds in India. This allows existing multi-cap schemes that are not comfortable with the regulatory mandate to invest 25 per cent each in large-, mid- and small-cap stocks to migrate to the new category.

“A flexi cap strategy will allow the fund manager to invest wherever value and opportunities are available without restrictions. Investors can be at ease now that the multi-cap funds that they had invested will continue to operate, albeit with a new name,” said Neil Parag Parikh, chairman and CEO, PPFAS MF.

Industry players reckon most existing multi-cap funds will switch to the new category. This could also spell the death knell for the Rs 1.4-trillion multi-cap category as not many investors would be in favour of a minimum 25:25:25 asset allocation across large-, mid- and small-caps, especially given the liquidity constraints often faced in the small- and mid-cap stocks.

“I would expect many existing multi-cap funds to move to the flexi cap category, given that the former were anyways being managed as flexi-caps earlier. The multi-cap category, on the other hand, may not find too many takers,” said G Pradeepkumar, CEO, Union MF.

Kotak Standard Multicap Fund, the largest multi-cap fund, announced Friday it would move to the flexi cap category after taking requisite approvals and following due process. “Except the name of the fund (to be renamed as Kotak Standard Flexi cap Fund), everything else including the fund manager, investment process and fund portfolio will remain the same as before,” said Nilesh Shah, group president and MD, Kotak Mahindra Asset Management Company.

Sebi’s circular on the rejig in multi-cap allocation in September had initially created fears that the compulsion to deploy about Rs 26,000 crore in small-cap stocks and close to Rs 10,500 crore in mid-cap stocks, in just a few months, could create a bubble in those two segments. A majority of small-caps and a large number of mid-caps are highly illiquid.

Sebi later clarified that funds can not only rebalance portfolio in their multi-cap schemes but also facilitate a switch to other schemes and merge such schemes with large-cap schemes or convert them to another scheme.